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Avery Dennison Pins Growth Plan To Retail Label Business

By Bob Tita Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- After Avery Dennison Corp. (AVY) made heavy investments to become the biggest provider of labels and tags for tracking merchandise, Chairman and Chief Executive Dean Scarborough is turning to emerging technologies to fuel further growth in a traditionally low-tech industry. In particular, the company's retail information services segment is posting solid growth, and the fledgling market for radio-frequency identification, or RFID, tags could be another opportunity for Avery. Scarborough anticipates revenue from Avery's retail information unit consistently expanding by 5% to 7% a year with operating profit margins at 12% to 14% as the company leverages its industry-leading size. Avery also expects a revenue tailwind from retailers' increasing use of electronic identification tags to manage apparel inventories. Avery doubled the size of its apparel labels and price tags business in the past three years, invigorating a slow-growing revenue base dependent on office supplies and self-adhesive film stock used for labels on beer bottles, shampoo and other consumer products. But the steep downturn in retailing has kept the company's investments from paying off, especially its 2007 acquisition of label rival Paxar Corp. At a price of $1.34 billion, Paxar was the largest deal in the Avery's history. "Our timing was terrible," said Scarborough, 54, who has been CEO of Pasadena, Calif.-based Avery Dennison company since 2005. "We bought the business at the height of the market and then ran right into a nasty retail recession. We're not where we want to be, but we're making progress. In the second quarter, we finally put some points on the board." Sales in Avery's retail information services segment, which dropped 15% in 2009, grew 24% in the second quarter from a year earlier. The unit posted $35.6 million in operating profit after losing $5.1 million in the same quarter last year. Clothing labels and tags are a $15 billion global industry, and the job of coordinating and supplying the correct cloth, paper and adhesive-backed tags for garments made at some 30,000 different sites around the world is crucial to retailers and clothing brand owners. Avery operates 40 centers around the world that are capable of quickly designing, manufacturing and distributing labels and tags. "One of Avery's competitive advantages is its size and scale," said Thomas Mullarkey, an analyst for Morningstar Inc. "They can really fulfill a lot of global customers' needs." Avery plans to use its size to dominate the emerging market for radio frequency identification, or RFID, tags. The tags feature tiny computer chips with antennas that allow retailers to precisely monitor merchandise volumes with the wave of a hand-held scanner, eliminating the need for time-consuming physical inventory counts by employees. "With RFID, you'll be able to identify every single item in the store in two hours," Scarborough said. Scarborough said the current systems used for tracking inventories, which include barcode tags, often result in restocking errors that can deprive shoppers of items they want. Avery is supplying RFID tags to Wal-Mart Stores Inc. (WMT) for its initial rollout of the tags this fall on blue jeans and underwear. Scarborough said Avery is in discussions with nearly two dozen other retailers about RFID, but he declined to identify them until their plans are more definite. Avery's RFID revenue is estimated at $50 million this year, possibly increasing to $150 million in 2011. Some analysts predict the company's RFID revenue will eventually reach $500 million to $1 billion a year. Avery's net sales last year were $5.95 billion. But other observers remain skeptical about RFID. The technology has been criticized by personal privacy advocates who argue the tags will expose consumers to identity theft and electronic data harvesting by marketers interested in shoppers' purchasing habits and preferences. RFID appeared on the verge of widespread acceptance about five years ago, but U.S. retailers, including Wal-Mart, scuttled their rollouts because of cost concerns. RFID tags alone cost about 10 cents a piece, compared to a penny or two for standard paper price tickets with barcodes. "While RFID makes a lot of sense, retailers don't have the resources to support it right now," said Brian Sozzi, a retail analyst for Wall Street Strategies Inc. Scarborough maintains that retailers will be able to recover their RFID costs through lower labor expenses and rising sales volumes as shelves are better stocked. Scarborough attributes the retailers' previous lack of enthusiasm to strategies focused on opening more stores. With store growth now largely subdued, improving same-store sales has become more important. "These guys would kill for a same-store sales comparison that's up a half-point," Scarborough said. -By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com